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15 November 2019updated 24 Jul 2021 5:33am

Why the Scottish National Investment Bank will be a new source of political battles

Politicians will inevitably seek to influence the board and management of the new institution. 

By Chris Deerin

It says something about the evolving views of the role of the state that the plan for a Scottish National Investment Bank (SNIB) has cross-party support. Both Labour and the Greens on the left and the Conservatives on the right back the SNP’s proposed bank, which will have a taxpayer-funded budget of £2bn to be spent helping businesses to grow.

SNIB should open its doors next summer, at which point the political harmony may begin to fracture – there are differing views about how the bank should go about its work and what it should and shouldn’t do. But no one is seriously challenging the case for its existence.

The project took a major step forward on Friday with the announcement that Willie Watt, a respected investment banker, is to be chairman. A chief executive will be appointed shortly. The business community – especially the financial sector – is adamant that SNIB should be run by private-sector professionals with experience of investing and risk assessment.

This is where one of the problems is likely to arise. The new chief executive and their senior team will be on salaries that far exceed traditional public-sector pay scales. They might be earning less than they would in the private sector, but this is unlikely to prevent lurid tabloid tales of overpaid fat cats. Such was the fate of those who ran the UK government’s short-lived Green Investment Bank (GIB), which was privatised only a few years into its existence.

The GIB is one of the models for SNIB. It invested money in renewable energy projects that were otherwise struggling to raise funds. This government backing gave private investors the confidence to get involved, fixing what had been a market failure in the energy sector. GIB also performed the neat trick of making a profit for the public purse due to the returns on its investments. The architects of SNIB say they also looked at the British Business Bank and the Dutch state investment bank FMO when designing the project.

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SNIB will provide long-term patient capital and have two main goals. The first is to help SMEs scale up – Scotland has a poor record in business investment in R&D. Cash will be invested both in funds and directly into businesses and projects, taking shares of debt and equity. A modest rate of return is expected – somewhere between 2.5-3 per cent. The second goal is to tackle the “climate emergency”, which has been declared a priority by First Minister Nicola Sturgeon. Investments will be weighted towards green projects, in the hope that Scotland can become a world leader in the sector. This “mission-led” approach stems from the work of the renowned economist Mariana Mazzucato, who is on the First Minister’s Council of Economic Advisers.

The test of SNIB’s success, says a source close to the bank, will be whether projects that otherwise wouldn’t have got off the ground are set up and thriving. “We will also need much better collaboration between government departments and agencies such as Scottish Enterprise if Scotland is to be fit for purpose over the next few decades,” adds the source. There is some concern about a lack of demand in the economy. “One area where we need to see improvement is in the university sector. We’re world class at research and innovation, but we fall away when we get to the development and marketisation stages.”

The Bank will ostensibly have operational integrity, but business sources say it would be “naïve” to expect politicians won’t attempt to influence the board and management in relation to their investment choices, especially given SNIB’s substantial spending capacity  – £2bn over its first 10 years. If a minister is facing the closure of a politically sensitive business in his or her constituency, the bank might come under pressure to step in with a bail-out. “That’s not what SNIB is for,” says the source. “It must resist that.”

This is where the selection of a CEO matters. “That person needs to be a strong enough character to stand up to the politicians and even to threaten to resign if they’re put under undue pressure. The Bank will only remain operationally independent in the toughest of times if the CEO is willing to show their mettle.”

The new team will also have to walk a fine line between being seen to be attempting to direct the shape of the economy, and to be facilitating the energy of the private sector. The Tories especially are likely to rebel if they detect a hint of the former.

Political unity will get SNIB up and running. But those involved are all too aware of the battles that lie ahead.

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